Last Five Posts

Create Value, Not Jobs

Treat all economic questions from the viewpoint of the consumer for the interests of the consumer are the interests of the human race.

-Frederic Bastiat

Public discourse on matters of the economy is and has always been dominated by the idea that the road to prosperity is to create jobs. In a moment of high unemployment, the “create jobs” rhetoric becomes that much more prevalent. We get a “Jobs Bill“; opponents of Obama’s reform call it “job destroying“; after a brief period of discussing deficits and debt national news outlets turned right back to talking about jobs.

Reading Tyler Cowen’s The Great Stagnation and Erik Brynjolfsson and Andrew McAfee’s Race Against the Machine, I was surprised to see that they considered lack of jobs to be one of the key problems of our times. Surprised, because I have become accustomed to economists arguing that jobs are not what matter, wealth is. Upon closer examination, however, I think that what they are arguing is consistent with that–they are putting it into the rhetoric of jobs because that is accessible to most people, but what they are saying is different from what a politician means when he calls for job creation.

A Very Human Propensity

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

In a barter economy, things are straightforward. I can only get something I want from you if I give you something that you want. I have to provide you with something of value.

This is still how the economy works on a fundamental level; money is just an intermediary between barter exchanges. Instead of giving you something you want, I give my employer or my customer something that they want. They give me money, which I can give to you so that you can turn around and get something you want. The person that you give it to accepts it because they can turn around and exchange it for something that they want.

Sensing a theme? Wealth is merely the ability to get things that we want. Since most of us are not independently wealthy, we have to work to create things that other people want in order to get what we want. The most common way to do this since the dawn of the industrial revolution has been to work for someone who needs human labor to accomplish some end–an end that is valued by consumers.

But it isn’t the only way–Henry Ford wasn’t an “employee”; he was an entrepreneur who developed more efficient ways to provide consumers with something of value at a lower cost. Moreover, he figured out how a little value could be added by large numbers of workers in the process.

There are also freelancers; people who are not employees nor employers, but work for specific clients at specific times. Rather than providing a valued service steadily over time, they do it on a case by case basis, and depending on the industry can face lean seasons and busy seasons.

Value, Not Work

The point is, our goal should never be to “create jobs”. Our goal should be to enable people to contribute something valued by other people. The value is the point, not the work. If someone finds a way to provide value to hundreds of millions of people and it requires no more effort from them than batting their eyelashes, that would be a win.

So why are economists like Cowen and Brynjolfsson talking about jobs? The stories they are telling, while far from the same, have a common theme which I interpret as follows: the forward march of technology has made it very difficult for people who have traditionally had low-skill or even middle-skill occupations to contribute value. As Arnold Kling succinctly put it:

The paradox is this. A job seeker is looking for something for a well-defined job. But the trend seems to be that if a job can be defined, it can be automated or outsourced.

He goes on to say that people who are capable of working in “less structured environments” are going to get a premium at this moment–in other words, people like entrepreneurs and freelancers.

One industry overwhelmingly dominates the economy (first agriculture, then manufacturing).

Rapid technological change enormously increases the productivity of that industry while providing a lot of untapped potential in other areas.

Since many fewer workers are needed now, there’s a period of massive unemployment before entrepreneurs figure out how to make the most valuable use of all the surplus labor.

A new pattern of sustainable specialization and trade emerges that is optimal to the current state of technology.

In Kling and Brynjolfsson’s story, we’re at step 3. Technology has made it easy to replace workers with machines in old industries, but it is not yet obvious how those workers can contribute value in the young industries. Solving that problem is non-trivial.

An Important Distinction

This is not a matter of semantics. If you think the problem is a lack of jobs, all sorts of dangerous “solutions” may come to mind. Anything from having the government hiring en masse to do make-work, valueless jobs, to setting high tariffs and immigration restrictions so that domestic companies and labor do not have any foreign competition.

Frederic Bastiat was a 19th century French economic journalist who spilled a lot of ink attacking such foolish notions. You have to think about wealth from the perspective of the consumer. Yes, there would be more “work” to do if we cut off trade and immigration, but it would also impoverish just about everyone as the cost of getting anything would skyrocket. Getting a job is not an end unto itself; the whole point is to trade our labor for other things that we want. Getting a job at the cost of not being able to afford anything is an absurd proposition.

As for make-work jobs, I would rather the government send the poor a check to do what they want with than to force them to “play real job”. At least then they would have the time to think about how they can contribute something of real value!

Economists like Cowen and Kling get it. Farhad Manjoo does not. He wrote:

Most economists aren’t taking these worries very seriously. The idea that computers might significantly disrupt human labor markets—and, thus, further weaken the global economy—so far remains on the fringes.

Certainly technology can and is disrupting human labor markets–but that isn’t going to “further weaken the global economy”. It is going to increase our productivity, make it easier to provide consumers value for cheaper. It will make it hard for people replaced by machines to figure out how they can create additional value, for a time.

But we need to get our priorities straight; what we want to do is help people create value. Unless giving someone a job will enable them to create more value than it costs, the existence of that job is counterproductive.

The key isn’t ‘Creation’ bills. What’s at stake is real productivity. A bill to limit gov’t intervention in markets, reduce subsidies (of all kinds), and reduce limitations on entrepreneurial entry into markets (the paperwork I had to do to start a small business was excessive, in my opinion) would go further to creating jobs than any ‘jobs bill’.

If politicians were as accountable as the politicians seek to make businesses, perhaps we’d have some legitimate reform and improvement. But they stack the deck in their favor to avoid being voted out.

Fredushnik, there can’t BE any single definition of “real value” – ever. It must always be in the eye of the beholder. It must be defined by the creator of that value, and by the person who perceives it as worthy of exchange. That is freedom, and the free market. Any attempt to codify value destroys it.

Adam, this is a brilliant, elegant, simple piece. Very good.
Value is created by meeting the needs of your customer. It’s very simple. Football players do this by entertaining millions who watch their games on TV.
CEOs have failed to do this by putting Shareholders ahead of customers and destroying businesses in the process.http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/
Jack Welch called this focus on shareholder value, instead of value creation, the “dumbest idea in the world” but only after his twenty year reign at GE, destroying the company’s ability to create value!